Coal dominance, fiscal constraints to temper South-east Asia’s clean energy boom
But there is also interest in ‘coal flexibility’ schemes, where coal plants complement renewable sources
[SINGAPORE] Even as South-east Asia hit a record in renewable energy investments last year, the region’s reliance on coal and fiscal constraints remain key obstacles to achieving a clean energy transition.
South-east Asia invested US$17 billion in renewable energy last year, a record high since at least 2015, according to the International Energy Agency.
That level is forecast to hit US$22 billion this year, more than 2.5 times the region’s investment in fossil fuel-based generation.
South-east Asia added 8 gigawatts (GW) of clean energy in 2025, and this figure could grow to 11 GW in 2026 as countries double down on wind and solar power, said Robert Liew, research director for global integrated research at consultancy Wood Mackenzie.
However, the growth outlook is tempered by the fiscal constraints that governments face, having to tackle multiple challenges this year, observers told The Business Times.
Governments are fighting inflation and seeking to protect their currencies, while also spending more on defence.
“So I wouldn’t bank on more public allocation for renewables this year,” said Sunil Veetil, who runs advisory Perdura in Singapore, which helps regional companies with the energy transition.
South-east Asia’s fossil fuel subsidies are also set to “rise sharply” this year compared with past years, noted Alloysius Joko Purwanto, a senior energy economist at the Economic Research Institute for Asean and East Asia (Eria).
He said: “Since the Iran crisis, price controls and subsidies have been providing some protection for consumers in South-east Asia. However, they come at significant fiscal cost and complicate market adjustments to the disruption.”
Similarly, strategic energy finance adviser Grant Hauber pointed to how the region’s spending on fuel subsidies casts a shadow on its renewable investments.
“In Indonesia’s case, those subsidies and compensation amounts are wrapped into the controlled price of coal – the domestic price obligation – which distorts the economics of the power sector,” said Hauber, who is from the Institute for Energy Economics and Financial Analysis (IEEFA).
Beating the coal addiction
High reliance on coal is another obstacle. South-east Asia tapped the pollutive fossil fuel for 47 per cent of power generation in 2024 – up from 37 per cent in 2015.
Countries such as the Philippines, Vietnam and Thailand have also turned to coal to cope with the energy crisis arising from the US-Iran war.
Coal’s dominance comes even amid efforts such as the Just Energy Transition Partnership (JETP) – a multilateral financing scheme to encourage the phase-out of coal and the adoption of renewables.
In 2022, Indonesia entered a JETP agreement with the aim to achieve a 44 per cent share of renewable energy generation by 2030, while accelerating the retirement of coal plants. It secured US$20 billion in commitments.
The same year, Vietnam also inked a JETP agreement to mobilise US$15.5 billion for the energy transition. The goal is for renewables to account for 47 per cent of electricity generation by 2030, while limiting coal-fired generation capacity to a peak of 30.2 GW.
JETP and other blended finance mechanisms – where public or philanthropic capital is used to draw in more private investments – have been slow to spur the actual decommissioning of coal plants, noted Veetil.
A key challenge is that the region’s power plants are relatively young and backed by long-term contracts, which makes early retirement financially challenging, said Alnie Demoral, an Asia energy analyst at Ember, a think tank.
Coal subsidies also “remain entrenched as governments continue to balance energy affordability and inflation risk”, said Gilles Pascual, Asean power and utilities leader at consultancy EY-Parthenon.
Adding to these challenges, the US withdrew from JETP in 2025, creating “uncertainty at a time when investment is badly needed”, said Trang Nguyen, head of international programmes and engagement at the Climateworks Centre, a non-profit.
Coal “flex” and other solutions
Despite the obstacles, there is also a growing realisation of the need to diversify away from coal – not just for environmental reasons, but also for financial ones.
Short-term switching to coal in the wake of the Iran war pushes up prices, said Amy Kong, a research analyst at Zero Carbon Analytics. “The latest crisis has shown that coal is not insulated from geopolitical shocks.”
In addition, Indonesia’s June decision to centralise coal exports has created uncertainty for importers such as Vietnam and Thailand.
Pascual sees interest in “coal flexibility” schemes, where coal plants are not entirely phased out, but generate power on a flexible basis to compensate for fluctuations in renewable power.
This is in contrast to the traditional use of coal plants as “baseload” assets – continuously at or near full capacity.
Hauber of IEEFA called for a rethink of coal phase-out scheme designs – for instance, by packaging the shutdown of a coal plant with opportunities to invest in renewable energy assets.
He believes that what could really get the coal phase-out moving is the carbon market in Indonesia. The country has already introduced a cap-and-trade mechanism, but its carbon price is among the lowest in the world.
“The mechanism is there – you just have to crank up the limits to the right level and then the price will go up,” he said.
Growing attention on grid constraints
Another key catalyst for South-east Asia’s clean energy boom will be to invest in the supporting infrastructure while removing regulatory obstacles.
“Batteries, grids, and flexibility solutions are attracting growing attention as investors recognise that energy security depends not only on how much renewable energy is built, but also on how effectively it can be delivered and managed,” said Ember’s Demoral.
Nguyen of the Climateworks Centre also sees renewed attention on offshore wind power – a segment that has progressed slowly in Asia due to regulatory barriers and lengthy permitting processes.
“The current geopolitical situation may create additional urgency to address these challenges and move these projects forward, particularly in countries with high potential such as the Philippines and Vietnam,” she said.
Dr Christopher Len, a senior fellow at the Iseas-Yusof Ishak Institute, noted that investors are interested but need clarity.
“The challenge has never been about the lack of money, but the shortage of bankable solar and wind projects with clear rules and offtake arrangements,” he said, noting that there is “still a lot of capital waiting on the sidelines”.
Many of the region’s market systems are not flexible enough to allow more private-sector participation, noted Alloysius of Eria.
The energy crisis this year serves as a wake-up call for South-east Asia to address these challenges. But as Veetil noted, the region’s approach should not be to “forget once things settle and wake up when it happens again”.
